The Fed Is Essentially Refusing To Fight Inflation

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In his Daily Market Notes report to investors, while commenting on the fed refusing to fight inflation, Louis Navellier wrote:

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ECB Moves Capital

Modern Monetary Theory (MMT) remains alive and well at the Bank of Japan and the Federal Reserve, but especially at the European Central Bank (ECB) as they boosted their quantitative easing and declared that they would not lift their interest rates above zero until inflation reached a 2% annual rate. This ECB action weakened the euro and caused foreign capital to pour into the U.S. seeking positive yields, versus the negative yields that have been all too common in Japan and much of Europe for several years now.

The Federal Reserve is not only embracing MMT but is also on the path to negative interest ratesFirst, they’ll have to break a few thresholds, like the 10-year Treasury bond staying below the 1.2% level for a significant time. (In the wake of Friday’s better-than-expected payroll report, rates rose back to 1.3%.)

Federal Reserve

On Friday, the Labor Department announced that 943,000 payroll jobs were created in July, substantially above economists’ consensus expectation of 865,000. Also impressive was that the May and June job totals were revised up to 614,000.   (from 583,000 previously estimated) and 938,000 (from 850,000), respectively. Also, the unemployment rate in July declined substantially to 5.4% from 5.9% in June.

Average hourly earnings improved by 11 cents (+0.4%) in July to $30.54 per hour. Overall, this was simply a stunning payroll report that bodes well for future economic growth due to all the new workers being added to the labor force.

Fed Is Refusing To Fight Inflation

Nonetheless, the Fed is essentially refusing to fight inflation until the approximately six million jobs lost during the pandemic are restored. Unfortunately, the labor force participation rate has fallen 1.6%. While it is possible that many workers opted for early retirement, many mysteries remain, such as why about 20% of people in their 20s are neither working nor in school. What are they doing? There are definitely some severe disruptions, especially in education, both in attendance and curricula. For example, approximately 80% of the STEM (science, technology, engineering, and mathematics) students in the California State University I attended decided not to return after the Covid-19 restrictions were lifted.

This all means that the “Goldilocks” environment of low interest rates and accommodative Fed policy will persist. Due to strong order backlog from supply chain glitches, I expect the U.S. economy will continue to grow at a 6% annual pace in the third quarter, while corporate sales and earnings momentum will start to decelerate gradually. It is imperative that consumer spending and confidence remain strong, especially as the holiday shopping season approaches. Overall, this is an impressive economic recovery.

Positive Economic News

Most of the economic news is positive despite negative media reports.  Factory orders rose 1.5% in June, new weekly unemployment claims came in at 385,000 continuing unemployment claims were down, the ISM manufacturing signals expansion, and its its non-manufacturing (service) index surged in July.

By contrast, China’s purchasing managers index (PMI) slipped to 50.4 indicating almost no expansion, the Delta variat is spreading and some economists are trimming their GDP estimates as more travel restrictions are imposed.